So what are lenders using as criteria today for mortgage qualification?
February 6th, 2010 | by mbhunter |I’ve been talking about some things related to the home purchase we’re doing now. One of the conditions of purchasing our new home was ability to get financing. Since I couldn’t buy with cash, I needed to apply for a mortgage. What I couldn’t do was make the purchase contingent on the sale of my current home (the property we were interested in was a foreclosure), so I needed to be able to qualify for the new loan without settling my current mortgage.
This seemed to be a bit harder of a condition to meet since it would mean carrying a higher debt load. I was a little concerned that I wouldn’t qualify, especially now that lenders weren’t writing loans for anyone who happened to have a pulse anymore.
Back before I knew what I could qualify for, I asked around over at Cash Commons to see what kind of mortgage qualification criteria lenders were using to determine a maximum loan amount. Reduce Debt Faster gave an insightful answer which included things like:
- Housing expense ratio (ratio of principal, interest, taxes, and insurance to monthly gross income)
- Debt to income ratio (ratio of total debt service to monthly gross income)
- Credit score (now they’re looking for 750-ish for prime rates)
- Income level (the higher, the better)
- Job stability (the more, the better)
- Down payment (the more, the better)
- Loan-to-value ratio (the smaller, the better)
After I applied and got my pre-qualification letter, my jaw dropped at how much they approved me for. Now, I did have a great credit score (even better than FCN’s before it dropped) and the only debt I carried was my current mortgage. The credit union used the 40% debt to income ratio to determine what they could lend me. But what got me was that the 40% was based on gross income, not net income. This would have allowed us to purchase nearly twice the house we were interested in. If I was worried about qualifying, those worries were blown out of the water.
My take on it is that if you’re the right candidate for a loan then they’ll let you borrow up to your eyeballs — even today. That doesn’t mean you have to, of course, and you shouldn’t. Banks are happy to lend you as much as they can if they have excellent assurance that they’ll get paid back. They’re not nearly as interested in what you have to do in the rest of your budget to make those payments back to them. You’ll give up a lot of things before you give up your house.
So, it may be tougher to qualify for a mortgage today than it was a few years ago, but it is possible.
One Response to “So what are lenders using as criteria today for mortgage qualification?”
By Reduce Debt Faster on Feb 10, 2010 | Reply
Great article, and you bring up a great point. Although some people will struggle to qualify for the mortgage they want, many others are STILL qualified for well over what they need. It is important that people realize that qualifying for a mortgage does not mean that you can afford it! Budgeting and looking at what you are currently paying in housing expenses versus what you would with a new mortgage are critical steps that you need to handle on your own, and your bank probably won’t mention that.